Foreign business in China

The coming squeeze?

Foreigners in China face a new tax

THE cost of expatriate labour in China may be about to soar, but expatriates themselves may reap few of the benefits, it appears. Chinese officials have long hinted that foreign firms and expatriates would eventually be required to pay into the domestic social-security system, but foreign firms were never sure whether they meant it. It seems they did.

Officials have now unveiled some detailed rules, which seem to require foreigners, as of October 15th, to pay into China's public scheme that provides pensions, health care and unemployment benefits.

The likely costs of the new measures are unknown. It is possible, but not certain, that foreigners will face stiffer taxes than locals. All that is clear, says KPMG, a tax consultancy, is that the law will squeeze both expats and their employers.

This would be a big change. In the past, foreigners have neither contributed to the system nor made much use of it. (Multinational firms typically offer their expats private health insurance and pensions.) Paying into the public scheme should, in theory, mean that foreigners get something back. But in practice, that may be tricky.

Foreigners are unlikely to benefit from unemployment insurance, because if they lose their job they typically lose the right to live in China. The rules suggest that pensions may be portable, but do not say how exactly this will work—and it is difficult for retired foreigners to obtain permanent residency in China.

Health care is even thornier. Suppose the new rules force foreign companies to pay for, and give their employees access to, the local health system. Should they then stop offering international insurance plans, which pay for treatment at the handful of world-class hospitals in China?

Some multinationals may be tempted. But China's health system, though improving, is still shoddy by rich-world standards and slapdash about protecting patients' privacy. Hill & Associates, a Hong Kong-based risk consultancy, fears that foreign firms which leave their expats at the mercy of the Chinese health system could face “a significant liability risk”.

The government may soften the new rules a bit. That is what happened with its controversial plan to promote “indigenous innovation”. In July, after an outcry from foreigners, it revoked some of the plan's most blatantly discriminatory provisions.

Still, the climate for foreign firms in China is starting to feel frosty. Costs are rising; regulations are growing more burdensome. Local competitors are playing rough. Some, like Cosco, a shipping giant, have brazenly tried to renege on contracts. Others have used their political allies to squeeze out foreign partners. One Westerner reveals that two foreign firms on whose boards he serves have recently been forced to leave the country, shedding their assets in fire sales. China is much too big and booming for foreign firms to ignore, and plenty of multinationals are doing splendidly there. But this latest turn of the screw may not be the last.